Wednesday, 9 March 2016

Dairy, oil, iron, rubber, steel, malinvestment


Oil prices are historically low, and oil producers are struggling to cope.

Dairy prices are historically low, and dairy farmers are struggling to cope.

These two stories are both in the news this morning.

These two stories are not unrelated.

The price of all commodities are at historical lows, not just these, and the reason for all is the same: the creation in the last seven years of counterfeit capital at record rates. This is what “stimulus season” finally wrought: an avalanche of malinvestment creating a mountain of over-supply.

See, here’s the thing. While many were worrying when stimulunacy was all the rage that record low interest rates being lent out at record levels would simply result in hyper-inflation. (And, if you look at Auckland house prices, they’re partly right.)

But not all of that record lending went into buying holidays for cashed-up Auckland vendors. As much or as more of that record lending went into production—to production in a very bad context. That context being this: this seven-year period of Greater Recession began because the structure of prodution was out of whack. (That’s what generally causes a recession: the structure of production being out of whack often because of a period of profligate lending at low interest rates.)

So, much of that new lending going into production around the world simply helped prop up these existing bad positions. It kept the zombies going. But as much again went into genuinely new production: of impossibly productive shale oil fields; of newly-rich dairy farms; of iron ore and steel and rubber and on and on and on.

300px-Hayekian_triangleAll that lending going into what Hayek explained as the “early stages” of production produced a short-term yet (this time) very flaccid boom. The bust is what happens when it is realised not all the world wants all that product, and at those prices as they are now few are in a position to stay afloat.

That was the Fourth Act of this depressing story played out on Morning Report today with fourth-generation Northland farmer Ben Smith one of those taking the fall. [Listen to his interview here.]

So too are rubber producers.

And iron-ore producers.

And oil producers.

And on, and on, and on.

It’s true that in the last two decades in which central banks have been organising debt into currency at record rates much economic progress has been made, and much real wealth has been produced. But in times like this it’s desperately hard to tell the malinvestment from the real thing.

Stated differently, the worldwide economic and industrial boom since the early 1990s was not indicative of sublime human progress or the break-out of a newly energetic market capitalism on a global basis. Instead, the approximate $50 trillion gain in the reported global GDP over the past two decades was an unhealthy and unsustainable economic deformation financed by a vast outpouring of fiat credit and false prices in the capital markets.
    For that reason, the radical swings in commodity prices during the last two decades mark not merely the unique local supply and demand factors which pertain to crude oil, copper, iron ore, or the rest, but the path of a central bank generated macro-economic bubble.

Folk like Ben Smith are now paying that price.


  • “Dairy farm debt has reached $38 billion, and the Reserve Bank's financial stability report said the risk of non-performing loans had increased over the past two years. It listed a ‘severe’ future scenario as a milk price of $4. The "worst case scenario" would feature a slow recovery in payout and sharp decline in land values resulting in non-performing loans - in other words, defaults on payments - increasing to about 44 percent.”
    Dairy downturn expected to hit land values: 'They are going to see land values drop' – RADIO NZ
  • “From the debt problems of an underwater government --now over $100 billion in debt and counting -- to the debt problems of underwater dairy farmers who, like dairy farmers around the globe, had credit extended to bring new dairy into production, only to find that debt-driven overproduction has lowered dairy prices below what many need even just to repay their debt.
    ”Can anyone yet spell malinvestment?”
    Dairy’s debt delusion – NOT PC, 2015
  • “Are you surprised?  Mainstream economists might be, but this is precisely what Austrian economists expect to see as the “rapid growth” of a credit-created boom turns into debt-based bust.   You see, Austrian economists understand two relevant things here that mainstreamers don’t … “
    Dairy bubble starts to pop – and guess who’s holding the pin? – NOT PC, 2009
  • “Investors’ desperate search for yield has all the Fed’s counterfeit capital been pumped into supplying more commodities, like oil, than the market actually demands? If so, does that make the recent savage surge in oil supply a classic Austrian mountain of malinvestment? And if so, then what happens next?”
    Q: So what happens when oil hits $45 a barrel? – NOT PC, 2015


  1. When bureaucrats collude with politicians to produce "growth" the deformations in the economy are deep and long-lasting unless an adult shows up to point to the obvious distortions where capital has fled. Thus Wall Street looks great, until the next collapse of the house of cards. Along with housing prices, commodity prices and other natural benchmarks.

  2. Hindsight is 20/20. Did you use your 'superior' understanding of economics to make a killing on commodity prices? I'm guessing no.


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